City Scale And Human Capital Externality

Using the 2008 China Economic Census firm-level data which contains the within-firm education composition of employees,this paper examines the sources and mechanisms of human capital externalities.First,we capture the externality of human capital by constructing a production function and examine its relationship with the size of the city.The results indicate that the positive externality of human capital is mainly significant in large cities and large enterprises.And the larger the city size,the more significant the positive externalities of human capital.After controlling the inputoutput linkages,this pattern still exists,indicating the large cities are the places with strong human capital externalities.Face-to-face interaction is an important mechanism for generating human capital externalities.We test it through the two clues,“communication costs” and “big city facilitates communication”.Specifically,we divide the Shanghai city into many 16)8)× 16)8)grids,and match firms with the grids according to address information.Using this constructed data,we verify that the human capital externality attenuates with the geographical distance.That is because the increasing distance will lead to reduced interaction and reduced human capital externalities.Then,we exploit the 2014 CLDS survey data and find that the interaction among workers increases with the scale of the city,especially for service sector ones.Furthermore,we also find that human capital externalities are mainly generated by the interaction of highly skilled employees,and this effect only exists in the local grids.The implication of our paper is that big cities are increasingly important to the development of the service economy.